OPEC Shows It Still Matters, and Right Now It’s Bearish for Oil

The last time OPEC met, its decision to leave output unchanged cast doubt on the group’s relevance.

That was a little premature.

From the ministers’ market-moving comments to the array of oil executives gathered in Vienna to court new ventures, the Organization of Petroleum Exporting Countries showed no loss of stature in the run-up to Friday’s meeting, at which it again decided to maintain its current output target. While OPEC has ceded the role of adjusting supply to balance the market, its strategy of keeping up production is still driving prices lower now -- and possibly higher later on.

“Reports of their death are greatly exaggerated,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London, said in an e-mail. “OPEC is still relevant because by driving down prices, and crowding out investment in higher-cost basins, they are sowing the seeds of the future price rally.”

Oil is poised for the biggest weekly drop since March after the group left daily output at 30 million barrels. Brent crude, the global benchmark, rose 2.1 percent to $63.31 a barrel Friday, compared with $108.79 a year ago. It’s down 3.4 percent this week. West Texas Intermediate crude, the U.S., benchmark rose 1.9 percent to $59.13 on Friday.

Swing Producer

Historically, OPEC -- led by its largest member, Saudi Arabia -- would curtail output to lift prices, playing the role of a swing producer. But the unprecedented surge of U.S. shale oil output sparked a battle for market share with, and within, the 12-nation group. OPEC is trying to squeeze out higher-cost producers.

“They’re still holding meetings, but if the meetings are not about controlling output, then they don’t matter in the same sense that they’ve mattered for 40 years,” said George Perry, a senior fellow in Washington at Brookings Institution. “Now they’re just trying to force someone else to do the cutting.”

OPEC lost the ability to control prices because of internal divisions and the rise of shale, Francisco Blanch, Bank of America Corp.’s New York-based head of global commodity research, said in an e-mail.

“It’s too early to write the obituary for OPEC, but it’s moaning and groaning on it’s deathbed,” Ed Morse, Citigroup Inc.’s New York-based head of global commodities research, said by phone. The Saudis “chose to collapse oil prices, but they did it as a defensive measure.”

Saudi Strategy

Ali al-Naimi, the Saudi oil minister, said June 1 that the strategy is working. There are signs he’s right: The number of rigs drilling for oil in the U.S. plunged 60 percent since October to the lowest in almost five years; shale production started falling in May; and drillers’ stocks underperformed the broader equity market.

Yet the gambit has been costly for OPEC, too. Saudi Arabia burned through currency reserves at a record pace. And prices are too low for most member countries to break even, according to the International Monetary Fund and ING Bank NV.

“The strategy failed to bring frackers to their knees and has been hugely costly to OPEC,” Giovanni Staunovo, a Zurich-based analyst at UBS AG, said by phone. “They still matter, but they are not anymore the swing producer so they have a different role now than before.”